Cisco FYQ2 Ahead: Raymond James, Citi See Upside

By Tiernan Ray

Cisco Systems (CSCO) reports fiscal Q2 earnings for the three months ending January next Wednesday, February 13th, and the Street is tuning up its numbers.

The consensus for the quarter is $12.06 billion in revenue and 48 cents profit per share. For the fiscal Q3, analysts are modeling Cisco to project $12.23 billion and 49 cents a share.

Simon Leopold of Raymond James this morning reiterates an Outperform rating on the shares and a $25 price target, writing that he expects the company to meet both on top line and bottom line, after surveying public economic data and his own “supply chain checks,” writing, “The data points largely imply continued uncertainty yet a stabilizing environment.”

“Incorporating comments from vendors who have already reported, we expect an in-line quarter, and we hold a favorable bias with an improving enterprise market.”

Leopold thinks the company may forecast 5% to 7% growth, which would be better than the 5.6% growth that is embedded in the Q3 consensus.

There’s lots to ask the company about the economic outlook and the state of carrier spending, Leopold writes, but he likes “the strategic trajectory”:

Networking includes a mix of hardware AND software, and Cisco is shifting towards software. Cisco has generated $6 billion in annual software sales, and expects to reach $12 billion in 3-5 years. Of Cisco’s 28,000 engineers, 25,000 are in software. Acquisitions are telling; 10 of its 11 most recent acquisitions were software related, and software can boost margin. Cisco essentially exits consumer with the Linksys sale. We do not expect large acquisitions but modest deals remain likely.

Citigroup’s Kevin Dennean reiterates a Buy rating and this morning raised his price target to $24 from $21, projecting revenue to be “at least in line with management’s guidance of + 3.5% to + 5.5%,” or $11.93 billion to $12.13 billion. The outlook for Q3 will likely be in line with the $12.2 billion but may be “slightly better” “with potential for top line beat on an improving demand environment”:

Given results of other IT vendors, we expect outsized growth from Cisco’s data center segment (estimated Expected share price return +10% q/q growth). Further, we expect sequential growth (albeit modest) in switching and routing. By geography, we expect to see relative strength from North America and potential for Europe to beat very low expectations. Government spending likely remains muted in the near term given the fiscal cliff debate in the US.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.